Rockwell Automation Inc

NYSE:ROK

Earnings Call Transcript 2022-Q2

[Operator]

Thank you for holding and welcome to Rockwell Automation's Quarterly Conference Call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions. [Operator Instructions]

At this time, I would like to turn the call over to Jessica Kourakos, Head of Investor Relations. Ms. Kourakos, please go ahead.

[Jessica Kourakos, Head, Investor Relations]

Thanks Rob. Good morning and thank you for joining us for Rockwell Automation's Second Quarter Fiscal 2022 Earnings Release Conference Call. With me today is Blake Moret, our Chairman and CEO; and Nick Gangestad, our CFO.

Our results were released earlier this morning and the press release and charts have been posted to our website. Both the press release and charts included in our call today will reference non-GAAP measures. Both the press release and charts include reconciliations of these non-GAAP measures. A webcast of this call will be available on our website for replay for the next 30 days.

For your convenience, a transcript of our prepared remarks will also be available on our website at the conclusion of today's call. Additional information and news about our company can also be found on Rockwell's Investor Relations Twitter feed using the handles @investorsrok, that's @investorsrok.

Before we get started, I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings.

So, with that, I'll hand the call over to Blake.

[Blake Moret, Chairman & Chief Executive Officer]

Thanks Jessica and good morning everyone. Thank you for joining us today. Before providing detail on second quarter results, which were below our expectations, I want to provide general comments on the business environment. Through the first half of our fiscal ,year two themes stand out. The first is broad-based demand growth across industries, geographies, and offerings. Substantial backlog in all three business segments, low cancellation rates, and detailed component supply forecasts give us confidence that we will achieve double-digit revenue growth this fiscal year and reach $9 billion of profitable sales in the next couple of years.

The second theme is persistent supply chain constraints and associated cost inflation, which put particular pressure on Q2 sales and earnings. Since our last earnings release in January, we've seen supplier push outs and de-commits for electronic component shipments, the impact of unexpected COVID-related shutdowns in China, and Russia started war in Ukraine. These have had an impact on our results and guidance. So, let's get into the detail on our quarter, the outlook, and what we are doing to maximize Rockwell's business performance and long-term value.

Our second quarter results are summarized on slide three. Total orders grew by 37% ,once again reflecting very strong demand across our portfolio of core automation and digital transformation solutions. Total revenue grew 2% year-over-year in the quarter. Organic sales grew a little over 1% versus prior year, worse than our expectations due to the supply chain challenges. Through six months Rockwell's organic topline has grown 9% year-over-year.

Orders momentum was broad-based across all three business segments. However, product shipments and solutions with significant hardware content were limited by multiple component shortages.

In the Intelligent Devices business segment, organic sales declined 3% versus prior year, a sharp reversal from the 25% growth in the first quarter, reflecting volatile components supply. Within this segment's motion business, sales of our Independent Cart Technology grew strong double digits and our orders more than doubled from a year ago. Software & Control organic sales grew a little less than 1%, also reflecting component shortages. We continue to see strong order growth in this business led by logic and visualization.

In Lifecycle Services, organic sales increased 11% versus the prior year, led by 24% growth at Sensia. Demand is broadly increasing in Lifecycle Services as demonstrated by a 1.34 book-to-bill. Information Solutions & Connected Services grew strong double digits in both orders and revenue. Industrial cybersecurity demand was strong in the quarter with orders up 90% year-over-year, as customers in life sciences, food and beverage, mining and many other end markets are increasingly relying on us to provide the robust network technology and real-time domain expertise to keep their critical operations secure and resilient.

In the quarter, one of our Plex wins was with Reautomotive, an automotive technology company and EV platform maker headquartered in the EMEA region, where our cloud-native smart manufacturing platform will enable the state-of-the-art plan with real-time production monitoring, inventory and quality management, creating an agile manufacturing system needed for customized electric vehicles. You will recall that globalizing market access for Plex' software was an important synergy to be realized through this deal.

Last month, Plex also became available on Microsoft's Azure Cloud in Europe and we're partnering with Microsoft to promote this new capability. At Fiix, we had another great quarter with ARR growing over 40%. We continue to win new logos including our first wins in Asia. Our partnership with PTC continues to grow and in the quarter, we booked software subscriptions for digital performance management based on ThingWorx. This new solution helps identify prioritize and act on debottlenecking opportunities that have the greatest potential P&L impact in manufacturing sites. We combine great technology and domain expertise to create a very strong value proposition for our customers. In the quarter, organic ARR grew by 17%.

Let's turn to slide 4. Our usual Q2 end market performance slide is in the appendix. It's important to understand that this quarter, sales growth have declined in specific industry verticals is primarily based on the particular products being shipped into these verticals and the degree they were impacted by component shortages rather than underlying demand. Working left to right on the slide, auto and e-commerce, two very important verticals we serve within our discrete industry segment were down in the quarter with the resulting single-digit decline for the discrete segment.

The majority of sales to these verticals are in products, which were heavily impacted by component shortages that impacted our ability to ship to these customers. In contrast, orders for auto and e-commerce remain very strong. We continue to see large competitive wins with our Independent Cart Technology for motion control and battery applications. And about a third of our total auto business is expected to be for electric vehicle applications in the full year.

We also had an important sustainability win this quarter at Electra Battery Materials, a leading provider of low-carbon and sustainable metals to the EV automotive sector. Rockwell was chosen to provide a turnkey solution for North America's first integrated and environmentally sustainable battery materials plant.

In e-commerce and warehouse automation, we continue to win expansion projects with our flexible material handling technology and digital twin software. And in semiconductor our offerings can be found in chip making machinery, material handling equipment and building management systems at the largest semiconductor and semiconductor capital equipment companies in the world. It is clear we are playing a critical role in this industry's plans for multibillion dollar capacity expansion.

We continue to see strong broad-based demand in food and beverage with particular focus on digital transformation projects. Life sciences sales were up double digits as two-thirds of our life sciences business is in software, solutions and services that are less dependent on electronic components. Oil and gas sales were up double digits led by improving trends in upstream and midstream. Our Sensia joint venture had strong orders and ships in the quarter and is expected to grow strong double digits for the year.

In summary, multi-year capital investments across many end markets coupled with higher automation and digital transformation intensity have created high backlog and a continuing strong order funnel to support growth in each industry segment we serve.

Turning now to Slide 5 and our Q2 organic regional sales performance. North America organic sales declined by about 3% versus the prior year due to the higher mix of Intelligent Devices in this region. The Intelligent Devices segment was more heavily impacted by component shortages this quarter. We continue to expect more balanced sales growth across regions for the full year and expect North America to be the fastest-growing region in fiscal 2022. Latin America sales were up 13%. EMEA sales increased 6% and Asia Pacific grew 9% due in part to the higher solutions content in this region. In China, we saw high single-digit growth driven by strength in mass transit, life sciences, tire and oil and gas.

Let's turn to Slide 6, which is a new slide we thought would be helpful this quarter. The high backlog, we've been building over the last few quarters and continued low cancellation rates, set the stage for strong revenue growth in the second half of fiscal 2022 and beyond. We do expect lead times and backlog to stabilize over the next year. And at that point, orders and shipment levels will begin to converge, which is a good thing. In the near term, the primary limiting factor to growth is component availability.

So as we turn to Slide 7, let's go a bit deeper into some of the actions we are taking to improve semiconductor, chip availability and our overall resiliency. We expect component shipments to increase in the coming quarters due to several factors. The first is improved material flow from key suppliers over the next couple of quarters. Where we are seeing improved flow from existing suppliers, several factors are contributing, such as the addition of incremental capacity, improved allocation percentages, opportunistic broker buys and some of these suppliers recovery from discrete events like fires and floods.

We have also reengineered certain products to utilize components with better supply resiliency. For example, the new series of PanelView operator interface has enabled us to double the shipment quantity in the last two months. We have significantly accelerated our manufacturing capacity investments in our Twinsburg and Singapore facilities over the last year which will benefit production and resiliency in the second half of fiscal 2022.

We continue to qualify new and additional semiconductor chip vendors, to create redundant sources for individual components and to diversify our supplier base and we expect to see the benefit in fiscal Q4. We continue to invest in diversifying our portfolio and see continued double-digit growth in our Information Solutions & Connected Services, which are less dependent on hardware supply chains.

Price is also a meaningful contributor to our growth and our resiliency in mitigating inflation. We have very strong pricing power in the market, thanks to our highly differentiated offerings. We're seeing good price realization as annual customer agreements renew and we are taking action to get quicker realization of future price increases. In the last year, we have announced several price increases totaling 17%, materially benefiting the latter portion of this fiscal year and even more so in fiscal 2023. However, as you know there are risks that cannot yet be accurately quantified, which is one of the reasons, we have widened our range for growth expectations for the full year. These risks include the duration and potential escalation of the war in Ukraine.

We have suspended the small amount of business we do in Russia and Belarus, less than half of 1% of total sales. We are seeing logistics cost increases due to higher energy costs as well as constrained and lengthened air freight lanes. Another source of risk is, the widespread shutdown of businesses in China due to COVID infection outbreaks. Our plants have partially reopened due to the critical role our products and services play in industries such as semiconductor, but the bigger risk is from upstream suppliers with operations in the area. We have built in some risk for China shutdowns, but it is difficult to quantify this risk in the next two quarters.

Let's now turn to Slide 8, to review highlights for the full year outlook. Orders for the year are expected to approach $10 billion. At some point, we expect orders to moderate as lead times for our products return to more normal levels. However, orders are expected to remain well above pre-pandemic levels given the amount of capital projects underway in industries we serve. We continue to expect double-digit reported sales growth, but we've reduced the midpoint and widened the range in part given the volatility of component supply that we saw in the second quarter. April component supply and total sales are tracking well with our forecast.

Acquisitions are expected to do well and contribute over two points of profitable growth. We continue to expect double-digit growth in both core automation as well as Information Solutions & Connected Services. We continue to expect another year of double-digit annual recurring revenue growth, which makes up over 8% of our total revenue. I'm pleased with the impact of both acquisitions and organic investments are having in these new lines of business.

We have reduced our margin expectation and adjusted EPS target range for the year. The midpoint of the adjusted EPS range represents one point of increase over the prior year and a 13% increase without the impact of last year's lower tax rate and benefit from a one-time legal settlement. And as noted on the slide the Board authorized an additional $1 billion of share repurchases.

Nick will now add detail to our Q2 results and our financial outlook for fiscal 2022. Nick?

[Nick Gangestad, Chief Financial Officer]

Thank you, Blake, and good morning everyone. I'll start on slide 9, second quarter key financial information. Second quarter reported sales were up 2% over last year. This is below our expectations and was directly linked to electronic component availability in the quarter. Q2 organic sales were up 1.3% and acquisitions contributed 2.3 points to total growth. Currency translation decreased sales by 1.8%.

Segment operating margin was 15.7%, approximately 300 basis points worse than we expected and primarily impacted by lower-than-expected sales volume and higher input costs. Versus last year, our margins declined 630 basis points mostly due to negative price cost and higher investments in key growth areas. I will comment further on price cost on the next page.

Our adjusted EPS in the quarter was $1.66 and 31% down from the prior year. As we said last quarter, we expect Q2 to be the most impacted by negative price cost as the benefits from prior price actions will be more heavily weighted to the second half of fiscal year 2022 and into fiscal year 2023.

I'll cover a year-over-year adjusted EPS bridge on a later slide. The adjusted effective tax rate for the second quarter was 16% and in line with the prior year. Free cash flow was $46 million in the quarter and down compared to the prior year due to lower pre-tax income and higher income tax payments. Income tax payments were in line with our expectations and higher year-over-year due to the payments made in the current quarter in the US related to fiscal year 2021 discrete tax transactions. Free cash flow results were lower than expectations driven by lower pre-tax income and higher working capital as we continue to build our subassemblies for more rapid conversion into finished goods as we receive critical components.

Turning to page 10. This is a new slide we added this quarter. This slide shows the actual impacts for quarter one and quarter two and what we included in our projections for the second half for both price and input costs.

First on pricing. From our three price increases since last summer, we expect those actions to provide about $400 million of cost recovery once fully implemented. Less than 10% of this benefit was realized in the first half of fiscal year 2022. The ramp to achieve the pricing impact occurs, because much of our pricing is set by pricing agreements we have with our customers.

Once we announce a price increase, these customers will not see the increases until their current annual agreements renew. We are implementing actions to accelerate realization on future price increases.

The price growth projected here is only from previously announced price increases and factors in higher inflationary costs not yet seen. If inflation forecast for fiscal 2023 worsens more than expected we will take further price actions to offset these costs.

On input costs, we did see a higher year-over-year and sequential increase in input costs in Q2. These increases were driven by increased logistics costs and a higher level of broker buys. We anticipate these elevated costs to continue increasing for the balance of the year.

For fiscal 2022, we expect input costs to increase over $200 million, primarily due to higher electronic component costs and higher freight. On a net price cost basis, we are negative in the first half and positive in the second half. We now expect full year price cost to be slightly negative in fiscal 2022.

Slide 11 provides the sales and margin performance overview of our three operating segments. Total reported sales were up mid to high-single-digits in both our Software & Control and Lifecycle Services segments. Intelligent Devices was down 5% as this segment was impacted more by supply chain constraints.

Intelligent Devices organic sales were down 3% in Q2 and up 10% in the first half. Compared to last year Intelligent Devices margins declined 920 basis points to 14.6% driven by negative price cost investment spend and lower volumes.

This segment accounted for the vast majority of the miss to our internal expectations in both sales and margins. We expect the second half margins in this segment to expand by 200 to 300 basis points sequentially on higher volumes and higher price from earlier implemented price actions.

Software & Control organic sales were up less than one point and 4% in the first half. Segment margins were up sequentially for this segment and declined 520 basis points compared to last year, mostly due to higher year-over-year investment spend, negative price/cost and the impact of acquisition integration costs. We expect the second half margins in this segment to expand by over 600 basis points sequentially on higher sales and higher price from implemented price actions.

Lifecycle Services grew organic sales by 11% including more than 20% growth from Sensia. Demand remains strong across all businesses and end markets. Book-to-bill was 1.34 for Q2. Segment margin was up sequentially for this segment and declined 170 basis points compared to the prior year, driven by lower labor utilization caused by supply chain constraints, partially offset by higher sales volume and lower incentive compensation. Margin is expected to grow through the balance of the year with strong sales growth and a higher margin backlog.

The next slide 12 provides the adjusted EPS walk from Q2 fiscal 2021 to Q2 fiscal 2022. Starting on the left. Core performance was down about $0.75 on a 1.3% organic sales increase as we continue to make growth-related investments. We also were impacted by the timing of merit increases and lower labor utilization.

As previously discussed price/cost had a negative $0.25 impact in the quarter. Given our updated guidance we lowered our estimate for fiscal year 2022 incentive compensation. On a year-over-year basis incentive compensation was about a $0.25 tailwind. This brings us to our total EPS of $1.66. Let's move on to the next Slide 13, guidance for fiscal 2022.

We are updating our sales guidance to a new range of approximately $7.8 billion to $8 billion in fiscal 2022, up 11% to 15% for the year. We expect organic sales growth to be in the range of 10% to 14%. We expect currency translation to be a headwind of 1.5 points and about 2.5 points of growth coming from acquisitions. Our wider sales guidance range reflects the volatility we see in the component supply and uncertainty of the full impact of COVID-related shutdowns in China.

As Blake mentioned earlier, we are forecasting an increase in sales in the second half in line with improved material flow from key suppliers. From a calendarization perspective, we are forecasting improved sequential performance over the balance of the year with a heavier weighting in Q4, driven by the resiliency actions Blake mentioned as well as the timing from higher price realization. We expect full year segment operating margin to be about 20%. This is a 150 basis point reduction from our prior guide and is the result of our volume decrease.

The impact from higher input costs since our January guidance is expected to be more than offset with reduced spending levels including lower incentive compensation. We will continue to prioritize our growth and resiliency investments. We expect second half margins of around 22%, up four percentage points from first half levels, primarily driven from higher sales volume and a 250 basis point improvement from price cost.

The first half impact of price cost and margins on a year-over-year basis was dilutive by approximately 250 basis points and the margin impact in the second half from price cost will be accretive by over 100 basis points. We expect margins to improve sequentially 300 to 400 basis points in the third quarter and another 400 to 500 basis points in the fourth quarter. We now expect full year core earnings conversion of between 20% and 25% with second half core conversion of approximately 40%.

We continue to expect the full year adjusted effective tax rate to be around 17%. We do not anticipate any material discrete items to impact tax in fiscal 2022. We are decreasing our adjusted EPS guidance range to $9.20 to $9.80. At the midpoint of the range, this is up about one point compared to the prior year. Finally, we expect free cash -- we expect full year fiscal 2022 free cash flow conversion of about 85% of adjusted income. The decrease from our prior guide of 90% is driven by higher working capital where we continue to have high inventory levels in order to support our increased demand.

A few additional comments on fiscal 2022 guidance. Corporate and other expense is projected around $120 million. Net interest expense for fiscal 2022 is expected to be about $115 million. We're assuming average diluted shares outstanding of about 117 million shares. Finally, on capital deployment our capital allocation priorities for this year remain the same including our focus on deleveraging. As Blake mentioned earlier, the Board authorized another $1 billion of share repurchases. Board and management are committed to using our capital deployment framework to drive long-term share owner value including opportunities for increased share repurchases.

Turning now to Page 14. This slide bridges the midpoint of our January adjusted EPS guidance range to the midpoint of our new range. Starting on to the midpoint of our new guidance. Starting on the left. There is a lower contribution from core operating performance due to the lower organic sales guidance partially offset by lower spend. We now expect price cost to be negative for the full year or a $0.25 negative impact versus our January guidance. Currency is expected to be a $0.20 headwind. Next, given the decrease in our forecasted performance, there is about a $0.35 impact from a projected lower bonus expense, which brings the new midpoint of the guidance range to $9.50. Although not on this page, we continue to expect our acquisitions including Plex to be about neutral this year including incremental interest expense or a year-over-year benefit of about $0.15.

With that, I'll turn it back over to Blake for some closing remarks before we start Q&A.

[Blake Moret, Chairman & Chief Executive Officer]

Thanks, Nick. This was a tough quarter, but we are aggressively working to temper the impact of persistent and volatile supply chain shortages. We have provided guidance that reflects a detailed view of expected component availability and actions we are taking to increase the flow of product and solutions to the market. We are beginning to see increases in some of the semiconductors we use, we continue to qualify new sources and important new capacity is being built for the technology we use in many of our products. For example, the incremental fab capacity a major supplier is planning to bring online will directly benefit a number of our product families in early 2023. While we do not anticipate supply chain challenges to end soon, we do expect gradual sequential improvement over the coming quarters. I want to thank our suppliers for the recognition of the critical role we play in US manufacturing and industrial applications around the world. We are on track with our manufacturing capacity expansion to ensure that internal equipment and processes support our revenue growth in fiscal year '22 and beyond.

Despite these challenges we are also on offense. We continue to introduce new differentiated technology and services including the January opening of our Israeli Cybersecurity Operations Center to support worldwide customers. Later this year we will release new FactoryTalk, operator interface and design software at our annual automation fair.

We have reduced spending plans in response to the higher cost but we are prioritizing programs that will generate new revenue in the coming years and we are increasing investments that strengthen our resiliency. We continue to focus on accelerating profitable growth within the long-term financial framework that has served us and our investors well.

We complement internal investment with a disciplined capital allocation that is focused on creating value. The capabilities and dedication of our people continue to set us apart. From our manufacturing associates and plants around the world to our salespeople working together with supply chain professionals to meet our customers' most critical needs through our development engineers balancing the simultaneous demands of building component resiliency and launching new products to the teams who are focused on keeping our people safe and productive, we're confident that our extra effort will be remembered as we help manufacturers speed cloth protect and move the world.

Jessica will now begin the Q&A session.

[Jessica Kourakos, Head, Investor Relations]

Operator you may begin Q&A. [Operator Instructions] Go ahead Rob.

[Operator]

[Operator Instructions] And your first question comes from the line of Scott Davis from Melius Research. Your line is open.

[Scott Davis, Melius Research]

Good morning, everybody.

[Blake Moret, Chairman & Chief Executive Officer]

Good morning.

[Scott Davis, Melius Research]

I'm not going to fixate on the details of the quarter as much as talk about what do you think your customers do if we were to run into a recession? Is it a different playbook this time because they're so far behind on digital transformation? Do those projects continue? Do they get delayed? Do they stop and then restart down there? I mean how does it -- how do you guys think about how your customers act or respond if -- particularly on the consumer side if we do hit a recession?

[Blake Moret, Chairman & Chief Executive Officer]

Yes. Scott I'll make some comments and Nick may add to that as well. But we look at an industry-by-industry view of what the stated investments are in these different industries and what's likely to happen which of these are more at risk if we see the effects of inflation continuing to weigh on the economy and some of these macroeconomic events that have happened here in the last few months.

Certain of the big multiyear investments we think are going to be resilient through that. I'll start with semiconductor. With several hundred billion dollars of announced capacity expansions by these fabs and back-end suppliers I don't think that those are going to be thrown off track by the economic conditions and inflation because there's just such a need for that in the world as we are all seeing. So I think investments in semiconductor in electric vehicle as every company regardless of the current economic conditions is moving to produce vehicles that the world is looking for.

Life sciences -- the continued demand for vaccines and other medicines. The digital transformation in food and beverage activities as people are trying to be more competitive and save cost. So as you look across the oil and gas, the high cost of oil and the need to pump more to be more efficient I think there's certain underlying secular trends that are driving that.

To be sure in the cycle, we're seeing the impact of chip shortages and huge inflationary pressures. But I think these multiyear capacity expansion projects along with the enormous backlog that we and others have built up are going to create a little different dynamic than typical cyclical approaches.

And then finally, we are happy with our position working with these customers who are really involved in the most important capacity expansion. So I think there's a good portion of the investment Scott that have been announced that are going to continue on because they have to meet the kind of demand that we're seeing in the world.

[Scott Davis, Melius Research]

Okay. Good color. I'll stick to one question. Thank you. Good luck.

[Blake Moret, Chairman & Chief Executive Officer]

Thanks.

[Operator]

Your next question comes from the line of Andrew Obin from Bank of America. Your line is open.

[Andrew Obin, Bank of America]

Hey, good morning.

[Blake Moret, Chairman & Chief Executive Officer]

Hi, Andrew. Good morning.

[Andrew Obin, Bank of America]

Hi. Could you just talk about how it did sort of component availability progressed throughout the quarter? And what kind of visibility on your supply chain you have in terms of their ability to add capacity because we're sort of getting into this chicken and egg thing right? If you guys can ship your controllers to your customers I wonder how they can have add capacity if you can't provide them with controllers? So a that's my question. Thanks a lot.

[Blake Moret, Chairman & Chief Executive Officer]

Sure, Andrew. I mean it is an interesting dynamic. The circularity of what we're providing to capital equipment suppliers in semiconductor and directly to some of the big fab owners is dated to some extent by the availability of our equipment. So we're absolutely seeing how critical we are in these operations.

I don't know that the general availability of existing suppliers changed a whole lot from month to month as we went through the quarter although we did see the early benefits of some of the reengineering that we have done with our products.

I mentioned the PanelView and I think it's a good example because we now have redundant bills of material between the new and the old series PanelView that give us already significantly increased flow. And we see other reengineering efforts that will start coming online in Q3 and Q4.

We have done a detailed product-by-product analysis of all the chips that go into those various products. As you can imagine with the breadth of SKUs we offer there's a highly diverse supplier base to this and that gives us the confidence in the guidance going forward, which do reflect more of our suppliers increasing their basic flow with incremental capacity expansions. Obviously, it takes a while for the brand-new greenfield capacity to come online. But between now and then, we are seeing increased flow for the reasons that I mentioned in my script. Nick?

[Nick Gangestad, Chief Financial Officer]

Hey, Andrew, specifically to the first part of your question, we’ll head on month-to-month during the quarter. We saw some improvements in availability as the quarter went on with March being noticeably our largest month of the quarter of shipments out we were able to do.

[Andrew Obin, Bank of America]

Thanks so much. Good luck.

[Nick Gangestad, Chief Financial Officer]

Thank you.

[Operator]

Your next question comes from the line of Jeff Sprague from Vertical Research. Your line is open.

[Jeff Sprague, Vertical Research]

Thank you. Good morning.

[Blake Moret, Chairman & Chief Executive Officer]

Good morning, Jeff.

[Jeff Sprague, Vertical Research]

Hey, good morning. Just on price and price cost. So you're talking about the 17% price increase. $400 million is obviously 6%. Are you suggesting you expect some significant additional price, or is that kind of the normal leakage between kind of headline price announcements and what is realized?

And also Nick you might have been going back and forth between sequential and year-over-year. But I thought you said cost is only going to be $200 million for the year. Maybe that was just an incremental number. But can you clarify that? Maybe just clarify the whole kind of price/cost equation for the year?

[Nick Gangestad, Chief Financial Officer]

Great. Yes. Thanks Jeff. From the three price increases that we put into place those impact the pricing that we have on our products. There are parts of our business such as Lifecycle Services that those general price increases don't apply to and those are done on a contract and -- and project-by-project basis. So that 17% and the ultimate yield of $400 million that applies to our price increases on our products that we're selling.

And that $400 million that will progress through the -- through fiscal year 2022 and 2023. And by the late 2023 that fiscal year 2023 that's when we expect to be at the fully implemented at that annualized $400 million of price increase. As far as the cost impact. For the full fiscal year 2022 versus the input costs that we had in fiscal year 2021 that's what we're saying year-over-year is going to be a $200 million increase.

Now we expect that to continue to go up from those input costs to continue to go up. That's why we put the price increases in that we've had in anticipation of further cost increases in the second half of 2022 and into 2023. If it turns out that our projections that we've underestimated the amount of input cost inflation we're prepared to act with another price increase if needed. But right now we believe we have some cushion in 2023 a little bit of cushion there.

[Jeff Sprague, Vertical Research]

Okay. Great. Thank you.

[Operator]

Your next question comes from the line of Josh Pokrzywinski from Morgan Stanley. Your line is open.

[Josh Pokrzywinski, Morgan Stanley]

Hi, Good morning, guys.

[Blake Moret, Chairman & Chief Executive Officer]

Good morning, Josh.

[Josh Pokrzywinski, Morgan Stanley]

So just on your comment earlier Blake, you expect this order and revenue environment to sort of converge over the next year or so sort of implies the $9 billion is on the table before too long. I guess, what's your sense on the margin on that? And we've talked a little bit about price/cost but I'm wondering sort of what's the mix or kind of pricing level in that backlog and the confidence that this stuff starts to come out that you'll be pleased with the margins on that? And I guess, the context for that is I think last quarter you talked about some pretty decent pricing power and maybe still got a little surprised on price cost this quarter. So just trying to see how repriceable that backlog is today.

[Blake Moret, Chairman & Chief Executive Officer]

Yes. The majority of the backlog is in the higher-margin product as opposed to solutions. So the general quality of the backlog, with respect to the margin is good. Nick, kind of talked about the increasing benefits of price increases that we have already implemented and as customer agreements, come due for renewal over the coming quarters we'll see a steadily mounting benefit from those price increases. And as both of us have said, we're prepared to do more if necessary. So I think the margin is good. And as we see the growth, we also see in terms of absorption and so on that there's an actual impact that expands margins there. We remain committed to the long-term framework that we've talked about for the last few years in terms of conversion of incremental revenue and we're sizing the business to continue to show that commitment for good conversion. And as Nick said, the second half of the year we think will demonstrate that.

[Josh Pokrzywinski, Morgan Stanley]

Great. Thanks.

[Blake Moret, Chairman & Chief Executive Officer]

Thanks, Josh.

[Operator]

Your next question comes from the line of Julian Mitchell from Barclays. Your line is open.

[Julian Mitchell, Barclays]

Hi, good morning. That's a very clear guidance on the sort of the profit walk on price and cost. I just wanted to go to circle back to other pieces in that bridge, sort of incentive compensation and then investment spend. Maybe help us understand exactly what that new incentive comp tailwind is in pre-tax dollars, and also what the investment spend guided headwind is? I think it was $200 million headwind before for the year. What's the new number? And then, how much of those two factors boost the second half profits? Just trying to get to that kind of walk to those big margin increases in the back half. Any color around that -- those two items please?

[Nick Gangestad, Chief Financial Officer]

Julian, in terms of our incentive comp that I highlighted are what we often call our bonus. We started the year with a plan, that that would be $130 million. Given our reduced guidance expectation for the full year, we've reduced that from $130 million down to $80 million. That $50 million reduction from our original plan, is evenly balanced between first half and second half. In terms of investment spend, you're correct. We started the year saying, we expect investment spend to go up approximately $200 million, we now expect that – we scale that spending down to now instead of increasing $200 million to only increase approximately $100 million and that will be part of the benefit that we expect in margin in the second half of the year.

[Julian Mitchell, Barclays]

Very helpful. Thank you.

[Operator]

Your next question comes from the line of Brendan Luecke from AllianceBernstein. Your line is open.

[Brendan Luecke, AllianceBernstein]

Good morning, all. Thanks for taking the question.

[Blake Moret, Chairman & Chief Executive Officer]

Good morning.

[Brendan Luecke, AllianceBernstein]

As you look at the last quarter here or the last couple of quarters, how are you thinking about your share position in North America, specifically and if you have a comment perhaps in other regions? Are there areas where you believe you're taking share for competitors or submarket segments where you're a bit more concerned?

[Blake Moret, Chairman & Chief Executive Officer]

Brendan we're – in a time as volatile as this we're looking over a period of multiple quarters as you suggest. And so that first half 9% shipments that is something that feels pretty good but even more importantly it's the kind of orders and the continued low cancellation rates that we're seeing in every region. And as we talked about North America, we'd see strong orders growth and we expect over the full year for North America to be our fastest-growing region.

There's a lot of anecdotes of where we have won new business from new customers in different spots around the world and we're proud of those but I don't think it's too early to call some major new share gain movement in those areas. So we're continuing to bring the orders in do our best of shipping it out and then we'll take a look at where we are. But in terms of the order flow not only in North America but across the world in Asia, in Europe with both our core automation offerings as well as the new digital transformation solutions I'm very pleased with the new business that we're winning from competitively held accounts.

[Brendan Luecke, AllianceBernstein]

Thank you.

[Operator]

Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open

[Andy Kaplowitz, Citigroup]

Blake, could you give us a little more color into what you're seeing in Lifecycle Services and Process Solutions in general? I think you mentioned the 1.34 book-to-bill in the segment which is good but it seems like a lot of the growth is concentrated in upstream oil and gas. How much leverage do you have to an uptick in midstream investment? Are you seeing movement in downstream projects at this point and – in mining, or is it really just component issues that are holding you back in those segments?

[Blake Moret, Chairman & Chief Executive Officer]

Sure. So in oil and gas our focus is on upstream and midstream. I would say there's a fair bit of activity particularly at our Sensia joint venture in terminals. And certainly a lot of people are talking about LNG but we had some good solutions there throughout our offering, especially in our power offering there. So midstream we are seeing good activity and good funnel. And what – and this goes back to my previous comment with Brendan, we're seeing some places where we're adding some of our new offerings on top of the core automation.

So adding the software, adding some of the higher level of services on there as well, again through Sensia, but they're all about adding automation, closed-loop control even autonomous solutions in these operations. So it's really about the upstream and the midstream and the downstream refinery control is not a target application for us, but we're doing a lot of the balance of plant as well as the safety systems. And we did see some nice wins in the quarter with our safety offering as well.

In mining, I think you asked about mining and we are seeing some increased activity there, particularly in Latin America, where we're seeing some of our strongest installed base and we're seeing some of that work come to life as well.

[Andy Kaplowitz, Citigroup]

Thanks Blake.

[Blake Moret, Chairman & Chief Executive Officer]

Yes, thank you.

[Operator]

Your next question comes from the line of Nigel Coe from Wolfe Research. Your line is open.

[Nigel Coe, Wolfe Research]

Thanks. Good morning. Just so we get the you gave us some elements of the second half ramp up Nick. Kind of a couple of things. Number one given that the bulk of your sales in North America goes through distribution, why does it take so long to get pricing through channel? Just want to understand that.

I think 85% 90% of your sales in North America go through channels. So, I just want to understand that dynamic. Then it seems like you implied 4Q is 320, 330 at the midpoint. Can you just confirm that's how you see the ramp up coming through? That would be helpful. Thanks.

[Nick Gangestad, Chief Financial Officer]

Nigel, I'll take the first part of that what you've calculated for the type of earnings in Q4 that's in the zone of what we're thinking to. You've interpreted that correctly. In terms of the elements that are driving our margin expansion in the second half of the year there's several things. First is -- and the biggest is the volume versus the first half of the year and versus last year that's the biggest. The flip we see on price costs moving to the positive is the second piece, and then the lowering of our spend is the third piece.

Now, in particular, your question about price and the timing it takes for us to be getting the price that's -- it's really a function of what I talked about in my opening remarks about we have many of our customers on annual agreements. And when we announce a price increase, they do not see that price increase -- even if it's going through distribution, they do not see that price increase until their next annual agreement renews. So, that can create noticeable lags from the time we announce until we're actually realizing that increase. That Nigel is the primary thing even for things through distribution that caused that lag.

[Blake Moret, Chairman & Chief Executive Officer]

Yes. And if I could add to that Nick and I both talked about actions to speed the realization of price. And we are increasing the number of agreements that will not have to wait for that full lag period, until annual agreements renew at customers. We've done that in certain places. I wish, we had that in place a year ago, but it's going to benefit us going forward as we make those changes.

[Nigel Coe, Wolfe Research]

Great. Thank you.

[Operator]

And your final question comes from the line of Noah Kaye from Oppenheimer & Company. Your line is open.

[Noah Kaye, Oppenheimer & Company]

Thanks for taking the question. In the past you provided some metrics around maybe some advanced ordering. You’re talking about orders for the year approaching $10 billion still how much of this do you think is really pulled forward? And I guess, the second part of it is frankly if you didn't have these component shortages how much higher would the revenue be for the year?

[Blake Moret, Chairman & Chief Executive Officer]

Yeah. The vast majority of the orders that we are receiving are for current needs for customers. We have line of sight. Our distributors have line of sight to the projects and the machines they're trying to ship. I've been on the call with several dozen customers as we talked about what their needs are and their plans to expand and the impact on us with that. So the vast majority as we've been talking about is that underlying demand further backed up by the very low continuing cancellation rates there.

And I think that, that continues as we go forward. A significant amount of that backlog with no component shortages would be shipping. So the order – the shipment levels would be much greater. But we also do see the impacts of long lead times on the orders as our customers MRP systems are automatically increasing the amount of orders that they're putting in. But it still – it represents underlying demand.

[Operator]

And thank you for your questions. I will now turn the call back over to Ms. Kourakos for some closing remarks.

[Jessica Kourakos, Head, Investor Relations]

Thanks Rob. That concludes today's call. So thank you all for joining us.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.